Matter of Riccardi (Modern Silver Linen Supply Co., Inc.), 36 N.Y.2d 945 (1975)

A broad arbitration clause in a contract is enforceable unless the restrictive covenants within the contract are facially violative of common-law rules or statutory prohibitions regarding restraints on employment opportunities or economic competition; the question of whether a subsequent contract supersedes earlier agreements is a matter for the arbitrators.

Summary

Riccardi, a former employee, sought to stay arbitration initiated by Modern Silver Linen Supply Co., Inc., his former employer, concerning alleged breaches of non-compete covenants in three employment contracts. Riccardi argued the contracts lacked mutuality, the covenants were in restraint of trade, and the third agreement superseded the first two. The Court of Appeals held that the arbitration clause was enforceable because the restrictive covenants were not facially illegal and the question of contract supersession was for the arbitrators to decide. The employer’s unilateral right to seek arbitration or legal action to enforce the restrictive covenant does not invalidate the agreement.

Facts

Modern Silver Linen Supply Co. sought arbitration against Riccardi, a former employee, alleging he violated restrictive covenants not to compete, as contained in three employment contracts. Each contract contained a broad arbitration clause covering all controversies or claims arising from the agreement. Riccardi initiated a proceeding to stay the arbitration.

Procedural History

Riccardi commenced a proceeding under CPLR 7503 to stay arbitration. The lower courts’ decisions are not explicitly stated in the opinion, but the Court of Appeals affirmed the order of the Appellate Division, implying that the lower courts had denied the stay of arbitration.

Issue(s)

1. Whether the arbitration agreements were unenforceable due to a lack of mutuality because the employer retained the right to seek either arbitration or legal action to enforce the restrictive covenant.
2. Whether the arbitration should be stayed because the restrictive covenants were in restraint of trade and violated state and federal antitrust policy.
3. Whether the question of whether a third contract superseded the first two agreements was a matter for the court or for the arbitrators to decide.

Holding

1. No, because the employer’s unilateral right to seek arbitration or legal action for enforcement of the restrictive covenant does not invalidate an otherwise enforceable agreement where all other obligations and provisions are reciprocal.
2. No, because the restrictive covenant, on its face, does not violate common-law rules applicable to restraints in employment opportunities or economic competition, nor does it fall within statutory prohibitions.
3. The question of whether the third contract superseded the first two agreements is a matter for the arbitrators to decide because there is a broad arbitration provision.

Court’s Reasoning

The Court reasoned that the employer’s option to pursue arbitration or legal action to enforce the restrictive covenant did not create a lack of mutuality sufficient to invalidate the contract. The court distinguished the cases cited by the petitioner, noting that in those cases, the option to invoke arbitration as to the whole contract was vested in one party, whereas here, all other obligations were reciprocal. The court relied on Matter of Exercycle Corp. [Maratta], 9 NY2d 329, 335, noting that restrictive covenants by their nature, operate to protect the promisee and do not by themselves invalidate an otherwise enforceable agreement.

Regarding the restraint of trade argument, the Court distinguished Matter of Aimcee Wholesale Corp. (Tomar Prods.), 21 NY2d 621, finding that the present case did not involve an issue of overriding public policy significance that would necessitate judicial intervention. The court emphasized that the restrictive covenant did not facially violate common-law rules or statutory prohibitions relating to restraints on employment or economic competition.

Finally, the Court stated that the issue of whether the third contract superseded the first two was a matter for the arbitrators, citing Matter of Lipman [Haeuser Shellac Co.], 289 NY 76. The Court emphasized that where a broad arbitration provision exists, the interpretation and application of the contract, including the question of supersession, are within the scope of the arbitrators’ authority.